Get acquainted with the Iranian retail sector and consumers of textiles

Get acquainted with the Iranian retail sector and consumers of textiles

The research arm of HKTC Hong Trade Council has evaluated the actual Iran retailing market and its future opportunities, including clothing. The breakdown of retailing in Iran is the focus of the report, obviously also Hong Kong’s opportunities are highlighted. TextileFuture is happy to provide its readers with this feature to familiarise yourself with the Iranian retail sector and consumers of clothing and textiles. In addition, we publish the latest IMF staff report of a visit to Iran comprising some latest economic facts

Iran is the second-most-populous country in the Middle East, trailing only Egypt. With a population of almost 80 million that includes a large percentage of young people who are interested in imported goods, the country shows great buying potential following the removal of major international sanctions in January 2016.

Iran is slowly being reintegrated into the global trade and financial system following the lifting of sanctions. Along with better access to the credit markets, a substantial amount of frozen assets has also been released to the Iranian government, providing it with the necessary capital to fund major overseas procurements to meet domestic needs and modernise many sectors. While industries such as energy and transport are the ones most likely to directly benefit from an increase in public spending, a spillover from public to private spending is also expected, creating business opportunities in Iran’s retail market in the post-sanctions era.

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A promising market for consumer goods

During the sanctions period, the Iranian government focused on nurturing its domestic industries as major international companies and retail brands left the country. However, while domestic brands still dominate the sales of most consumer goods, especially those targeting the low-to-mid segments, these products often fall short of meeting the quality and standards of international brands, which appeal more to the middle-class and affluent Iranian consumers.

With the lifting of major sanctions, Iran’s retail landscape is expected to undergo rapid changes to meet the increasing pent-up demand for authentic, high-quality imported goods, including electronics, telecom products and parts, watches and clocks, jewellery, clothing and other consumer products. Some of these have mostly found their way into the country through middlemen and informal channels, but more overseas companies will now be able to deal directly with their counterparts in Iran. By 2020, it is estimated that Iran’s total retail market will reach about US$167 billion, from USD 95 billion in 2015 (Source: All that glitters: Assessing opportunities and risks in post-sanctions Iran, Economist Intelligence Unit).

The country’s huge business potential has already drawn interest from some well-known consumer-goods companies looking to explore the market, including Italian designer brand Roberto Cavalli, French cosmetics retailer Sephora and German engineering and electronics giant Siemens. Apart from catering to the needs of high-end consumers, Iran’s middle class is equally thirsty for foreign-branded consumer goods. In this regard, Hong Kong companies with a competitive edge in product design and low production costs should find many business opportunities in the country’s medium-segment market.

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The top Iranian consumer expenditure categories in 2015, as estimated by Euromonitor International, were housing (30 % of the total), food and non-alcoholic beverages (24%), health goods and medical services (9 %), transport (9 %), clothing and footwear (6 %), household goods and services (5 %) and communications (5 %).

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Non-grocery consumer goods, clothing, electronics and cosmetics are likely to receive a more immediate boost, particularly those of the many popular European brands that already have a presence in Iran. These brands, many of which may have entered into agency agreements with Iranian companies for local distribution, will face fewer hurdles than their United States counterparts in strengthening their business ties, as American companies are still barred from direct trading with Iran due to US primary sanctions.

 

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Direct Sourcing Opportunity

HK Iran 2Despites decades-long sanctions on Iran imposed by the West, the United Arab Emirates has maintained strong trading ties with the country in light of the geographical proximity between them and the huge demand of Iranians, many of whom aspire to lifestyles supplemented by products of imported brands.

When sanctions were in force, Iranian importers primarily sourced their goods from Dubai, concomitantly helping to build a significant Iranian trade community in the UAE, which is reported to support thousands of Iran-originated companies. According to industrial sources, consumer goods such as branded clothing, handbags and electronic items were shipped first across the Persian Gulf from Dubai’s free trade zones (FTZs), such as the Jebel Ali Port, to Iranian free zones along the southern coastline, including Kish Island and Qeshm Island, which were then distributed to Iran’s boutiques across the country. Nevertheless, it remains unclear about the extent to which these goods underwent proper customs and import-duty processing upon importation into the Iranian mainland.

While it is anticipated that Dubai’s middleman role will remain for some time, many Iranian importers are now able to contemplate direct sourcing from overseas manufacturers other than those in Dubai. It should be noted, however, that many goods sourced or re-exported from Dubai originate from China. Owing to the difficulty and cost of travelling far from Iran – and the presence of a versatile and business-savvy Iranian trade community in Dubai, which offers credit and other tailor-made/customised services for buyers – the majority of Iran-based trading houses and importers will not travel to countries such as China, the world’s factory for most fast-moving consumer goods (FMCGs).

In a recent fact-finding trip to Iran, HKTDC Research found that Iranian importers are looking for a greater variety of goods to service market needs, and are increasingly interested in sourcing directly from China and Southeast Asian countries, where prices are lower. They have expressed a keen interest in sourcing stylish and competitively priced high-quality products from Hong Kong. To facilitate business-matching opportunities, the HKTDC has already appointed agents in Tehran and Mashhad to help Iranian companies interested in attending Hong Kong’s trade fairs, such as the Food Expo, the Watch & Clock Fair and the International Jewellery Show.

Young Iranians’ Demand for Fashion Items

Iran’s pent-up demand for imported goods, especially among young Iranians, has created a strong foundation to support rapid growth in the retail market. The country has a favourable demographic structure with 60 % of its population aged below 30 and born after the 1979 Iranian revolution. Even before the lifting of sanctions, this new generation of Iranians had been positively embracing Western cultures such as social media and donning branded apparel and accessories from overseas countries. DVDs of many Western movies have been on sale in local stores, although audio-visual products as such are not copyrighted. HKTDC Research was told by locals that even if shopkeepers or manufacturers had wanted to observe the intellectual-property requirements, they would not have had the proper channels to do so.

On the other hand, many Iranians have little trouble travelling overseas, including long-haul visits to European Union countries. Besides, many wealthy Iranians travelling short-haul like to spend their shopping holidays in Dubai or Istanbul, where they can be exposed to the latest fashion trends. Nowadays, international fashion brands such as Zara and Nike, as well as luxury brands like Gucci, can be found in Iran’s larger cities, such as Tehran, Mashhad, Isfahan and Shiraz. While many of these stores are run through agency arrangements, where one city can have multiple agencies, others simply cash-and-carry goods from abroad and sell a mix of brands.

In Iran, Islamic dress codes are observed all over the country, particularly those applying to women, who are required to cover their hair, neck, arms and legs in public. Iranian women cover their hair with scarves, usually a hijab; many wear knee-length overcoats known as a manteau, with trousers worn underneath.

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As for the cosmetics sector, the market in Iran is reported to be the second-largest in the Middle East, after Saudi Arabia, grossing about USD 3.5 billion in 2014. As Iran opens up to the world, awareness of beauty and personal-care products among young Iranians is expected to grow, with such products becoming more available.

Cheap and low-quality products from China and Turkey currently dominate the Iranian cosmetics market. Western brands, although offering better quality, are much more expensive and so less affordable by the average Iranian consumer. The huge price gap between low-quality and premium-branded items offers opportunities for Hong Kong companies to introduce affordable and quality cosmetics brands and products into the country.

When exporting cosmetics products to Iran, Hong Kong companies should select suitable items that match with their Iranian customers’ style and skin types. Facial makeup products, such as those with sun protection or anti-aging formulae, are popular in the country, while lips and nail products are also in demand, particularly among the younger generation.

Hong Kong’s Telecom exports to Iran show strong growth

In the first half of 2016, Hong Kong’s exports to Iran increased by 14.4 % to USD 71 million. Although the absolute trade value was small compared to Hong Kong’s exports to the UAE, which amounted to USD 3.5 billion in the same period, it should be noted that Hong Kong’s trade with Iran had not been fully reflected by bilateral trade figures.

Iran’s population is about nine times larger than the UAE’s, and it is presumed that a large amount of exports initially destined for the UAE is re-exported to Iran. In 2015, the UAE’s re-exports represented 58 % of its total non-oil exports, of which re-exports to Iran reached AED Dollar 37.7 billion (USD10.3 billion), accounting for 17 % of the UAE’s total re-exports.

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Not surprisingly, telecom equipment and parts forms the largest group of Hong Kong exports to Iran, accounting for about 30 % of the total. During HKTDC Research’s recent visit to Iran’s leading commercial districts, many stores were offering smartphones and computers by well-known brands. Genuine Apple and Samsung phones are sold through key retail outlets and specialty stores at a price premium to those available in Hong Kong. This fast-expanding Iranian market is accompanied by a surge in uptake rates of various consumer-electronics products. For example, mobile cellular subscriptions per 100 people in Iran increased to 87.8 % in 2014 from 72.6 % in 2010, according to the World Bank.

The increasing adoption of smartphones and tablets has also raised demand for accessories, such as screen protectors, earphones and power banks. Hong Kong companies exporting these accessories, both premium and mass, should find Iran to be a market with promising selling potential in the middle- to high-end market segment.

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A modernising retail landscape makes direct entry possible

In Iran, a strong multi-layer distribution network covering importers, wholesalers and retailers creates a fragmented retail market with manyHK Iran 6 small shops, government co-operatives and street markets. Bazaars – or marketplaces where individual retailers get their products from wholesalers – can be found in almost every city in Iran, an arrangement that puts the distribution of many consumer goods under the control of only a small number of key wholesalers.

The situation is showing gradual signs of improvement, however. For example, the UAE-based Majid al Futtaim Group has established a Western-style supermarket chain named Hyperstar in Iran, helping Iranian consumers to familiarise themselves with the concept of modern retailing by offering a wide range of products under one roof.

After experiencing the convenience of shopping in modern outlets – which offer not just a wide variety of products, but also better store layouts and shopping experiences than the traditional, small independent shops – many Iranian consumers are now calling for more modern shopping centres.

In Tehran alone, it is reported that there are more than 50 modern shopping centres, some of which house hundreds of stores, restaurants and coffee shops. Huge shopping complexes can also be found in other major cities, including the Proma Shopping Centre in Mashhad, the Isfahan City Centre in Isfahan and the Persian Gulf Complex in Shiraz.

The rise of modern shopping outlets potentially offers overseas companies new to the Iranian market a useful platform from which to set up their stores directly, even though entering into a franchise agreement with a reliable local partner is still the most common and workable option for overseas companies to tap into the Iranian market, which has become complex due to the business cultures and decades-long economic sanctions.

Land is certainly not cheap in Tehran, especially in the more affluent districts in the north of the city. High-street rents can vary from USD 100 to USD 220 per square metre per month. However, with more modern shopping outlets popping up, there should be a decent supply of retail space for rent for those interested in establishing a physical presence in the country. Following the lifting of international sanctions, a few Italian fashion brands such as Roberto Cavalli, Versace as well as leather goods maker Piquadro were reported to have established their own stores in Tehran, suggesting that the confidence in doing business in Iran is gradually improving among overseas companies.

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E-commerce Potential

Similar to many other emerging markets, Iran’s e-commerce sector is quickly gaining popularity. According to Euromonitor, online retail sales totalled IRR 6300 billion (USD 218 million) in 2015, chalking up growth of 212 % over 2010-2015 in constant value terms, with telecom and electronic products and consumer appliances registering the highest growth rates.

In the medium term, e-commerce is expected to gain momentum on the back of higher rates of internet penetration amid the Iranian government’s planned expansion of the country’s 3G and 4G networks. In the short term, however, a lack of modern payment options remains a major barrier to the further expansion of e-commerce.

Nowadays, Iran’s economy is primarily cash-based and major international credit cards such as Visa, MasterCard and American Express are not accepted in the country – a consequence of the now-lifted sanctions. This will certainly change in the future when the normalisation of international banking and financial activities takes place. In the absence of credit cards, debit cards issued by local banks have become a popular alternative for many Iranians and are the most common method for settling online payment, although cash on delivery is also available in some areas. (For more details about Iran’s remaining sanctions and its implications in the banking sector, please refer to Iran Unbound: Balancing Opportunities with Practical Business Risks.)

While selling via online platforms may be a step too far for many in the short term, Hong Kong companies can nevertheless consider promoting their products through digital channels as traditional advertising campaigns, either via television broadcasting or through magazines and newspapers, are also relatively limited in Iran due to tight restrictions by the Iranian government.

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As international social-media and internet platforms such as Facebook and YouTube are not available in Iran, the country has established many popular local alternatives in digital services and social-media networks, including the Google-like search engine Yooz and Amazon-lookalikes Bamilo and Digikala.

Awareness of Asian brands is generally low among Iranians and the perception is high that Chinese imports are of low-quality. As such, advertising through digital platforms may be a cost-effective way for Hong Kong companies to differentiate themselves from mainland Chinese firms and gradually build up brand images and advertise their products in the Iranian market.

The IMF has just released a new statement on Iran

This is the wording of an IMF staff concluding meeting of a visit in Iran, and TextileFuture would like to pass it on to its readers:

Economic conditions are improving substantially in 2016/17. Real GDP rebounded strongly over the first half of the year as sanctions eased post-JCPOA implementation. Oil production and exports rebounded quickly to pre-sanction levels, helping cushion the impact of low global oil prices. Increased activity in agriculture, auto production, trade and transport services has led the recovery in growth in the non-oil sector. Real GDP is projected to grow by at least 4.5 percent in 2016/17. The prudent monetary and fiscal policies adopted in recent years, along with favorable international food prices, allowed CPI inflation to decline to a low of 6.8 percent (y/y, point-to-point) in June 2016. Although point-to-point inflation has risen to 9.5 percent in September, on staff estimates inflation is expected to average 9.2 percent in 2016/17.

The government is implementing far-reaching, ambitious, reforms to support a sustained acceleration in growth. To anchor inflation over the medium-term, the authorities have proposed a fundamental overhaul of the monetary policy framework and plan to gradually reduce the non-oil fiscal deficit. They plan to clear government arrears, recapitalize banks and strengthen supervisory powers. New CFT laws have been passed and the government is committed to enhancing safeguards in the financial system to secure better access to the global financial system. The staff sees these reforms as critical if Iran is to harness its re-integration into the global economy to spur growth and become a more market-based, diversified economy.

The mission offers the following recommendations to support the government’s reform efforts:

Vulnerabilities are emerging that could erode Iran’s economic achievements. From the second half of 2015/16 when the economy was weak, the government stimulated growth by directing bank credit to selected sectors and reducing interest rates. On current policies, staff estimate that the non-oil fiscal deficit in 2016/17 will increase by 0.5 percent of non-oil GDP to reach 8.9 percent of non-oil GDP (or 7.7 percent of total GDP). Oil receipts to the budget are falling short because of the need to repay to the NDFI the funds that were borrowed last year. As a result, the overall fiscal deficit is expected to deteriorate to 2.7 percent of GDP in 2016/17 from 1.7 percent of GDP 2015/16. Moreover, this year’s budget requires additional financing (beyond the funding of this deficit) to proceed with the planned clearance of arrears (R.300,000 bn/2.3 percent of GDP). The combination of looser monetary and fiscal policies has fueled rapid growth in monetary aggregates. International reserves have fallen by about $7 billion since end-March 2016, reflecting valuation changes, the clearance of FX dues to export credit agencies and increased imports post-JCOPA implementation.

With economic activity recovering briskly, recalibrating monetary and fiscal policies at the margins will help keep inflation in single digits. Safeguarding the reduction in inflation will be essential to preserve the credibility of Iran’s reform efforts and ensure the planned unification of the exchange rate is durable. Adjustments in administered prices should be compatible with the objective of single-digit inflation. Steps to manage credit growth, for example, by slowing or halting the pace of expansion in directed credit schemes or implementing differentiated loan-loss provisions, would help stem the build-up of additional liquidity pressure. The Central Bank of Iran (CBI) should also assess what additional steps it can take to absorb excess liquidity. Fiscal policy also needs to help by avoiding excessive pro-cyclical stimulus. Every effort should be made to step-up revenue collections and contain spending, including by removing high income households from the subsidy beneficiaries list.

Enhancing the ability of the central bank to safeguard price stability. The proposed Central Bank Bill correctly places price stability as the core objective of monetary policy. However, the proposed governance structure of the CBI is complex and decision making committees are dominated by representatives of other government agencies. To enhance the ability of the CBI to pursue its inflation objective independently, staff recommend that the number of governing bodies be streamlined and membership limited to senior CBI officials and/or independent experts. Greater transparency and alternative reporting mechanisms can be explored to ensure the CBI remains accountable for implementation of its inflation objective. The central bank will also require instruments to intervene and manage liquidity to guide interest rates. The authorities should start issuing appropriate instruments, for example government bonds or central bank paper, for this purpose and allow for the possibility of an emergency liquidity facility at the CBI.

Reducing fiscal dominance and creating space for bank recapitalization and public investment needs. The 2017/18 budget should be guided by the need to gradually reduce the non-oil deficit in line with the permanent income norm not only to support low inflation but also to adjust to lower oil prices and higher debt service costs. The government appropriately intends to increase non-oil revenues to secure this adjustment and provide non-inflationary resources to fund higher public investment spending. Adopting a medium-term fiscal framework that is anchored on the non-oil deficit would contribute to better fiscal planning and management and allow for savings from oil revenues to be accumulated so to provide Iran a fiscal buffer against shocks.

Clearing government payment arrears and developing local debt markets. Provisional estimates suggest public debt could be as high as 40 percent of GDP once government arrears to the private sector are recognized. The Debt Management Office has adopted a prudent and phased approach to securitize part of these obligations. Claims are being carefully vetted and audited and can be netted against debt owed to the government. Parliament has approved the issue of new debt instruments to securitize a small part of these arrears in a phased manner to help develop local debt markets. However, parliament also approved the use of revaluation gains at the CBI to clear the government’s debts held by the financial system, which will reduce the CBI’s capital buffer and, consequently, its capacity to absorb future losses. Going forward, the cost of securitization of the remaining stock of arrears is best borne by the government given its fiscal origin. Securitization with new debt issuance would deepen local debt markets and could provide the CBI with an instrument to manage liquidity. It will be important to ensure the interest costs associated with new debt are adequately budgeted for.

 

Fundamental overhaul of the banking system is needed to help unleash higher growth in the private sector. Capital is low and the stock of non-performing loans remains high despite the securitization of government arrears and steps taken by the supervisor to require higher provisions. Policies of interest rate controls and directed credit constrain banks’ profitability and capacity to build capital. The financial sector reform strategy must ensure that the problems in the banking sector are fully addressed to lift financing constraints to growth. Staff suggest banks undertake forward looking tests of their commercial viability as part of an asset quality review. Where such tests identify shortfalls in capital or risk management practices, banks should be required to present and implement time-bound plans to remedy these shortfalls. Any bank that is not viable after such a process should be resolved. To enhance the commercial orientation of the state-owned banks, the burden of government-mandated credit policies should be moved to the budget and their recapitalization needs met via new long-term government bonds. A new corporate bankruptcy law would aid the reform. A comprehensive reform of this nature would enable the transition to Basel II and III reporting standards, boosting financial transparency. The upcoming IMF bank resolution workshop provides an opportunity to discuss options to address NPLs. The IMF is ready to provide further assistance to define and implement a financial sector reform plan.

 

The proposed banking bill strengthens supervisory powers. The CBI has taken important steps over the past year to restructure and bring unlicensed financial institutions (UFIs) under its supervision, helping address an important source of financial instability. The proposed Banking Bill further enhances the CBI’s powers to license and oversee UFIs, and it substantially enhances the supervisory tool-kit by providing for consolidated supervision and an array of early intervention measures. The draft law needs to clarify the CBI’s powers to revoke a banking license and what options are available for resolutions.

 

Implementation of the FATF plan will bolster Iran’s AML/CFT framework and facilitate re-integration of domestic banks into the global financial system. The IMF is willing to cooperate to provide information. The CBI has also requested banks prepare their financial statements using IFRS which will support transparency in the financial system. 

 

Increased transparency and timeliness in the publication of data on key economic variables will facilitate international investor interest in Iran and aid the development of debt markets.

 

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